SEC Finalizes New Money Market Rules

The U.S. Securities and Exchange Commission (SEC) voted on Wednesday, July 22nd, to approve the final version of new regulations on money fund (“money market”) mutual funds. The new rules require funds catering to large, institutional investors to give up a fixed $1 share price structure and float in value like other mutual funds. With these new money market rules, these money funds are also allowed to temporarily block investors from withdrawing their money in times of stress, or even permit the funds to charge a fee to redeem shares.

The new regulations specify that companies have up to two years to comply with the changes.

Statement from SEC Chair White

SEC Chairman Mary Jo White made some comments in support of the new money market rules ahead of the vote, saying, “This strong reform package will make our financial system more resilient.”

Nonpartisan vote

The vote to approve the tighter controls on money fund outflows was approved by a narrow 3-2 margin. Of note, it was an unusual nonpartisan vote, with SEC commissioners Kara Stein, a Democrat, and Michael Piwowar, a Republican, both voting against the new rules.

Piwowar explained he worried the SEC’s new approach would eliminate money funds’ appeal to investors, and said he wasn’t sure floating share prices would stop runs. Commissioner Stein elaborated that she worried the redemption restrictions would encourage, rather than minimize, investor stampedes during crises, mirroring the concerns mentioned by other regulators, including members of the Financial Stability Oversight Council.

Watered down from original rules

The final money market rules are less sweeping than an earlier proposal from the SEC. The version that was finally approved focuses the majority of the restrictions on institutional investors, who bolted from money market funds at a much greater rate than individual investors during the financial crisis.

The new rules aim to discourage institutional investors from fleeing money funds during periods of market crisis by training them to accept fluctuations in the value of their investments, and also by ensuring that money funds have the explicit legal ability to limit outflows.

Americans for Financial Reform sent us the following statement

We believe that the reforms adopted by the SEC today are not sufficient to properly address the threat of investor runs on money market funds and the systemic risk that could accompany such runs. In the case of redemption restrictions such as gates and liquidity fees, elements of the new rules could actually increase systemic risk. The rules do have some positive elements, including the establishment of a floating net asset value for institutional funds, which should reduce some of the advantages of early redemption and make investors more aware that money market funds pose real market risks and should not be viewed as a pure cash management product. But overall, the reforms finalized today appear inadequate to address the issues revealed during the 2008 financial crisis, when investor runs on money market funds triggered a massive public bailout of the sector. We expressed these views in our comment of September 17th, 2013 on the SEC’s proposed rule.

In the days and weeks ahead we will examine other elements of the final rule to see if they make progress in addressing systemic risks. We encourage the SEC to work closely with other regulators, including the Financial Stability Oversight Council and the Federal Reserve, to address remaining systemic risks related to money market funds. We also believe that improvements in the regulation of bank funding and wholesale funding markets more generally can address risks related to money market funds.